State Corporate Tax “Inversion” – Why More and More States are Considering Combined Reporting
Corporate inversion at the federal level has been the focus of much attention, with an estimated $2.1 trillion in American company profits sitting offshore. However, this is not just a country-to-country epidemic; it is also a challenge for states. Therefore, it should come as no surprise that more and more states, such as New Jersey, Maryland, and Indiana are advocating for bills that support “combined reporting,” which requires a multistate corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report. Such bills are aimed at stopping large multistate corporations from shifting profits earned in one state to another state that has a lower corporate tax rate or no corporate tax rate at all.
Since each state reports a different amount, it is hard to gage exactly how much money we are actually talking about. For example, New Jersey estimates that between $200 and $400 million annually is being siphoned from their state coffers to other states. According to New Jersey state advocates, combined reporting is an important means of leveling the playing field on how taxes are levied on mostly large, multistate corporations. They believe it is important that they pay their fair share to help support the pressing needs of their state. “It’s not a tax increase we’re after, it’s tax fairness,” Senator Linda Greenstein, representing parts of Mercer and Middlesex counties, stated in her recent article, “In Support of Combined Reporting Bill”. With such big dollars involved, state combined reporting bills will likely continue to be a top focus for state governments.
Whether a company shifts dollars to other states or leaves these funds within their respective state, the bottom line is that taking a proactive stance when managing state corporate income tax is prudent. Today, managing state corporate tax requires professional skills beyond filing tax returns, including:
- Assessing the impacts of proposed and passed legislation
- Navigating ambiguities across states
- Leveraging multistate strategy to lower effective tax rate (ETR)
- Managing the burn-down of state net operating losses (NOLs)
- Predicting cash tax impacts across multiple states and years
Luckily, the advancement of technology has made planning, calculating, and analyzing state income taxes far more efficient than previous manual processes, such as spreadsheets. So, whether or not state corporate “inversion” continues, audits decline or increase, or states adopt combined reporting bills to thwart state income tax shifting, progressive companies are looking at alternatives. Advanced state income tax software puts companies in the most advantageous position to reduce effective tax rates, manage impacts to cash, and minimize tax audit impacts for both time and tax.
Diane Tinney is the director of product management for Bloomberg BNA’s software products, responsible for developing and implementing corporate tax and accounting solutions. Prior to joining Bloomberg BNA, Diane founded several startups, managed a global corporate tax product development team, and worked for KPMG as a senior tax manager...